In 2013, Jackson Grundy Ltd, an estate agency across Northamptonshire, was fined £200,000.00 for breaches of Customer Due Diligence under the Money Laundering Regulations 2007 (as amended). There was never any suggestion of money laundering. However, certain administrative tasks and procedures were not consistently in place across some of the branch offices. It was therefore accepted that there was evidence of a degree of non-compliance, the fine that followed however, was disputed as being grossly disproportionate.
The fine was imposed by the Office of Fair Trading (“OFT”). The decision was made a handful of days prior to the OFT ceasing to exist with the responsibility of overseeing the application of the regulations transferring to HMRC. When Jackson Grundy requested a review of the OFT's decision, HMRC assumed the role.
At the time there was a standard policy to calculate penalties of this type. The OFT policy was termed the Interim Payment Policy (“IPP”). The IPP set out a step by step process for calculating penalties relative to a number of factors which included turnover from property sales. Jackson Grundy's appeal against the OFT’s decision for the first time challenged the lawfulness of this process.
The basis of the challenge was that the OFT’s fine was decided by an individual employed in the position of adjudicator. The individual was due to give a degree of independence from the case team handling the investigation and when the adjudicator's decision followed the same approach to that of the OFT, questions were raised as to whether or not such a role complied with the definition of “independence” for the purposes of Article 6(1) of The European Convention of Human Rights which required an “independent and impartial tribunal”.
A penalty was required to be ‘effective, proportionate and dissuasive’. The final step of the IPP raised the question as to whether or not the proposed penalty reached by this stage was “appropriate”. The failure to consider this final step of the process, it was alleged, was wholly unreasonable and when HMRC had the opportunity of revisiting the OFT’s initial findings, they failed to do so without justifying the significant difference between the OFT’s imposed penalty and that which HMRC would have reached in applying its own methodology. It was submitted that had HMRC calculated the penalty based upon their own guidelines, it would have reduced the penalty to £15,000.00 which was significantly less.
Without explanation or clarification from HMRC, Jackson Grundy were forced to pursue their appeal on the following grounds:-
- The OFT’s IPP was unlawful and inconsistent with being ‘effective, proportionate and dissuasive’.
- The IPP had been applied without consideration of the individual case and whether the amount was proportionate and did not go beyond what was reasonably required to ensure an effective and dissuasive penalty.
- The penalty was not consistent in any event with the IPP given that when considering a selection of starting points for the fine based upon the percentage of turnover, its figures were unjustified and insufficient attention was given to mitigating factors.
- As a result, the penalty exaggerated the extent of Jackson Grundy's failings and its impact.
When the matter came before Judge Howard M. Nolan and Carol Debell on the 24th to 26 February 2016, the case explored the IPP and relevant law in detail as well as hearing evidence from the OFT/HMRC's adjudicator and from Mr Jackson. In describing Mr Jackson as an “honest and impressive witness", the Tribunal identified failings in HMRC's approach. The Tribunal noted that HMRC had persisted in defending the OFT’s level of penalty stating that Jackson Grundy had suffered “a very considerable injustice in this case”. As a result, the penalty was reduced to £5,000.00. The Tribunal also made comments with regards to costs which led to Jackson Grundy making an application for HMRC to meet its costs of the appeal.
The appeal came before the Upper Tribunal Tax and Chancery Chamber on 1 February 2017. It was heard by Judge Colin Bishopp and Judge Timothy Herrington.
The Upper Tribunal confirmed the well-established principle that whilst a penalty must be proportionate to the offence, it must also be proportionate to the offender. It noted that Jackson Grundy was a ‘modest rural estate agency, whose staff knew most of its customers.’ It identified therefore that the risk that any of the customers might engage in money laundering, though it was not discounted altogether, was slight and in fact there was no evidence of any money laundering. Consequently, the failure of HMRC to give due consideration to the impact upon Jackson Grundy was considered to be ‘a bizarre approach.' No examination had taken place of profitability or ability to pay and further, whilst arguments based upon the fact that the penalty was 17 times higher than any other penalty imposed upon estate agents in the past, no comparative exercise had taken place to consider whether there were any distinctive features which would justify a much larger penalty.
The Tribunal concluded that:-
‘…we are satisfied that it should have been apparent to HMRC, reviewing the matter dispassionately, and by reference to the information available to them when the notice of appeal was served on them, that the review decision was so flawed that it could not properly be defended. It follows that HMRC acted unreasonably in “defending or conducting the proceedings”.’
Based upon this finding, HMRC were ordered to pay Jackson Grundy's costs of and incidental to its Appeal.
Sarah Canning commented:-
“From the outset of this case, the fine was disproportionate to the administrative failings. Frustratingly the Appeal process took nearly 3 years to establish that both OFT and HMRC had reached a flawed decision and consequently had to pay the price of that failure.”
Whilst the IPP is a process of the past, it is interesting to reflect upon the fact that independent reviews of decisions must be exactly that. Further, when a penalty is to be ‘effective, proportionate and dissuasive’ it must not only be proportionate to the offence but also to the offender.
For further information regarding Money Laundering Regulations, their application or indeed responding to a penalty, please contact Sarah Canning on (01604) 828282 or email firstname.lastname@example.org.